Stock Market Staying Overbought....Larger Pullback Coming Soon...

By: Jack_Steiman

But that doesn't mean we won't wiggle our way up a few more percent in this market before the bigger selling kicks in. It will kick in, folks. It's not if, but when. The selling will be extremely healthy, and it's very necessary, but since we're still in the buy-all-pullbacks phase of this rally, the market still works its way up higher in the days, and weeks, ahead before it gets a bit nasty to the downside. It's also important that the stocks go up some more, before the larger pullback kicks in, because the selling should be decent. The bulls want to be able to protect the breakout at 1320, or the long-term down trend line, they worked so hard to take out. If the market were to sell hard from here, it's quite likely we'd lose 1320.

That would be a negative, technically, for the bulls. It took time to make the move, and the last thing you want to do, is give it right back, especially since the breakout occurred with all the necessary ingredients in place, such as volume, advance decline line, etc. Because it took place this way, you'd also expect the big money that helped make the breakout come in, and support the market if it gets back to the breakout area. The further up we can rally, hopefully, 1370, or a drop higher, the more likely it will be that the bulls can handle the selling, once it gets down to the back test level of 1320. When you're overbought, there are no guarantees. We'll have to watch things very closely here, but my gut feeling is we'll be able to whipsaw our way somewhat higher before things sell off harder. Just don't be fooled into thinking there's never going to be a harder period of selling, because there will be, and it's not that far off into the future.

The bears tried hard to sell things off today, but the bulls would have none of it. Even though the RSI's are above 70 on the major index daily charts, there the bulls were as the market tried hard to sell without success. The dips are still being bought as new money is defending for now. With the momentum indicators so overbought, the new money will soon be overwhelmed, and the pullback will commence. Today was a classic example of what takes place once you take out critical resistance, such as S&P 500 1320 was. The bulls get braver, and those who are kicking themselves for missing much of this rally, want it. The bears also tend to give up faster than the bulls normally do, so they cover and buy back their short positions, and give new fuel to the rally. The S&P 500 barely sold off one point today. Slightly deeper selling on the Nasdaq, but with RSI on the Nasdaq daily chart at 77, it should, and needs to, sell harder than any other index to unwind things. A solid showing by the bulls all day as the bears could never get enough momentum going. While they will have to step away at some point soon, they don't look ready quite yet.

A very quiet week for new economic reports is not a bad thing for this market. There have been a plethora of reports the past few weeks that have been mostly favorable. This, in combination with solid earnings reports, overall, is what's allowing this market to work its way higher and stay overbought on the major index charts. Only report of any major significance this week will be the usual Thursday report on jobless claims. The market would like to see a consistent trend take place with the number two weeks back putting a fly in the ointment as it suddenly surged higher. The trend seems to be in place to keep the market happy, but just when you think it's safe to think things are improving, the rug gets pulled out. So we need to keep close tabs on how the jobless numbers keep getting reported. We have seen the most important economic report on manufacturing establish a good trend over the past many months. It has gone from the flat line at 50 for many months, up to the 54 area now. Nothing to get overly excited about, but the trend is definitely on the positive side of things. That's all the market wants to see. Not how strong it is historically, but how strong it is relative to the recent past. Numbers are needed to indicate the worst is over, and for now, they are showing just that.

The S&P 500 is at 1344. This is only 2 percent above the 1320 down trend line breakout level. Not enough. You ask me why? You are always telling us, Jack that one percent is enough. Normally that's true. But when you have 70-plus RSI's across the board on the daily index charts, two percent is not enough at all. This is why it's imperative for the market to try and sustain overbought conditions. Get the market four to five percent above, and then it's in business to defend 1320 when the heavier selling kicks in. 1320 is first up, and then 1307, if that gets broken. If that goes away, and it shouldn't, 1292 is next. 1350, and then 1370 is resistance. The bulls need to get this towards that 1370 number to feel, and be, safer technically. For now, the bulls are in control. But, please remember, that we are overbought, and thus, a snap down could occur at any moment. So, be safe with new plays. Don't overdo it here. The risk is rising rapidly.

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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